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The Commodity Futures Trading Commission (CFTC or Commission) adopted a final rule effective March 21, 2016,1 that eliminates the reporting and recordkeeping requirements under the CFTC’s existing trade option exemption for counterparties that are neither swap dealers (SDs) nor major swap participants (MSPs) (these non-SD/MSP counterparties are referred to herein as “commercial end-users”).2

In 2012, the Commission determined that certain options on physical commodities were swaps, but it exempted qualifying trade option transactions from most swap requirements in the Commodity Exchange Act and CFTC regulations.3 However, trade options remained subject to the CFTC’s Part 45 recordkeeping and reporting rules, subject to an exception from the reporting requirements where neither counterparty to a trade option had been required to report any other kind of swap under Part 45 during the prior 12-month period.4 Instead, the counterparties were permitted to file annually with the CFTC Form TO. In 2013, CFTC staff issued a no-action letter that effectively extended the option of filing Form TO in lieu of complying with Part 45 reporting requirements for commercial end-user counterparties, regardless of whether a counterparty had been required to report a nontrade option swap under Part 45 during the prior 12-month period.5

The final rule expands upon the relief provided in the CFTC’s 2013 no-action letter by eliminating altogether the requirement for commercial end-users to report trade options, whether on Form TO or pursuant to Part 45.6 Commercial end-users also are no longer required to comply with Part 45 recordkeeping requirements in connection with trade option activities, except that a commercial end-user engaging in trade options with an SD or MSP must continue to obtain and provide a legal entity identifier to the SD or MSP.7 The final rule also continues to subject all trade option counterparties, including commercial end-users, to CFTC swaps large trader reporting obligations and the CFTC’s anti-fraud provisions.8

Notably, in response to questions about whether the CFTC will apply its pending position limits proposal to trade options in the future, the Commission stated “that federal speculative position limits should not apply to trade options” and that the Commission intends to address the matter in the context of the pending proposal.9 Similarly, the final rule deletes a provision from the existing trade option exemption that would have subjected trade options to the CFTC’s Part 151 position limits rules. The CFTC considered this to be a technical amendment because Part 151 was vacated in 2012 before ever becoming effective.10

This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.

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